materials management sessions 1 and 2
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Materials Management: NIIT
Imperia: Sessions 1 and 2
Santanu Roy
Professor
Institute of Management Technology
Ghaziabad
sroy@imt.edu; rsan58@yahoo.co.uk
Corporate Supply Challenges
Need to control unit costs
Need to reduce the total cost of acquisition
The increasing influence of suppliers on
the purchaser’s ability to respond to end-
customers needs
Increased reliance on fewer suppliers
Trend towards reliance on suppliers for
design and build responsibilities for
complete subassemblies and subsystems
The Evolution of the Supply
Function
The Handling of Railway Supplies – Their
Purchase and Disposition
◦ Published in 1887
Attention in first half of 1900s to reliable
access to supply of raw materials, supplies
and services
Two vexing problems in the decade of the
1970s put senior management attention on
the supply function:
◦ international shortage of basic raw materials
◦ price inflation
The Evolution of the Supply
Function By 1990s firms faced challenges of
global “supply chains” and an increased
reliance on suppliers
◦ Outsourcing has led to increased reliance on
suppliers for key components and services
Technological developments in the early
21st century provides expectations for
supply chain integration, lower
transaction costs and faster response
times.
◦ The Internet and B2B e-commerce
• Clerical and tactical
• Focus on policies and
procedures
• Key challenge:
availability of supply
and cost
management
The Evolution of the Supply
Function
early
1900s early
21st century
• Strategic orientation
• Global supply
chains
• Executive level
leadership
• Key challenge:
Technology and
the Internet
Evolution of the Supply Chain
Pre 1939 1940-49 1950-69 1970-89 1990-1999
Clerical World War II Managerial
emphasis
Purchasing
strategy
Integration into
corporate strategy
Integration with supply networks and information technology
2000-Future
A New Competitive Environment
Increased Competition changes buyer/seller
balance of power
Evolution of competitive environment:
60’s/70’s
◦ Marketing strategies capturing loyalty.
◦ Strong engineering, design, and manufacturing functions to support market requirements.
◦ Customers needs translated into products.
◦ Need for high level quality at a reasonable cost.
◦ Need for flexibility and responsiveness.
A New Competitive Environment
Concept of Supply Chain Management
Emerges
Evolution of competitive environment:
80’s
◦ Need for flexibility and responsiveness
90’s
◦ Organizations realized materials and service inputs from
suppliers impacted ability to meet customer needs.
◦ Resulted in increased focus on supply base and
purchasing.
Why Purchasing is Important
As companies struggle to increase customer value by improving performance, many companies are turning their attention to purchasing and to supply management.
Why Purchasing is Important
Results of Good Supply
Management:
Potential for Profitability
Outsourcing
Improved product and service quality
EPI/ESI
Major Logistics Activities
customer service
demand
forecasting/planning
inventory management
logistics communications
material handling
order processing
packaging
• parts and service support
• plant and warehouse site
selection
• purchasing
• return goods handling
• reverse logistics
• traffic and transportation
• warehouse storage
The Buyer/Planner Concept
Combines planning and purchasing functions into one position ◦ Planners: Determine what materials are needed
and when
◦ Buyers: Handle sourcing and buying
Charged with responsibility for a specific line of inventory
Duties may include: establishing schedules, issues and analyzes quotations, places orders, monitors supplier performance, and keeps abreast of market trends, supplier capacities and technologies.
Supply Chain Management
“The design and management of seamless,
value-added processes across
organizational boundaries to meet the real
needs of the end customer. The
development and integration of people
and technological resources are critical to
successful supply chain integration.”
What are Purchasing and Supply
Management?
Purchasing is a functional
group/activity that supplies the
organization with materials. It is
often referred to as procurement.
Supply Management is a
progressive approach to managing
supply base and the supply chain.
What is a Value Chain?
A value chain is a sequence of business functions in which utility (usefulness) is added to products or services as they move from supplier to end customer
Value chains are often viewed like a river--upstream and downstream
NOTE: Value Chain discussion draws heavily from Michael Porter, Competitive Advantage--Creating and Sustaining Superior Performance
Primary and Support Activities
Primary Activities
Inbound logistics
Includes activities associated with receiving, storing, and disseminating inputs to support the product or service, including transportation, material handling, warehousing, inventory control, vehicle scheduling, and returns to suppliers
Primary and Support Activities
Primary Activities
Operations
Activities associated with transforming
inputs into final form, such as machining,
packaging, assembly, equipment
maintenance, testing, printing, and facility
operations
Primary and Support Activities
Primary Activities
Outbound logistics
Includes activities associated with
physically collecting, storing, and
distributing a product or service to
customers, such as finished goods
warehousing, material handling,
delivery, order processing, and
scheduling
Primary and Support
Activities Primary Activities
Marketing and Sales
Includes activities associated with providing a means to which buyers can purchase the product and inducing them to do so, such as advertising, promotion, sales force efforts, job quoting, channel selection, channel relations, and pricing
Primary and Support Activities
Primary Activities
Service
Includes activities associated with providing service to enhance or maintain the value of the product, such as installation, repair, training, parts supply, and product adjustment
Primary and Support Activities
Primary Activities
In any firm, all the categories of primary
activities are present to some degree
and play some role
Key primary activities often differ from
industry to industry
Primary and Support Activities
Support Activities
Firm infrastructure
Consists of a number of activities, including general management, planning, government affairs, finance, accounting, legal, and quality management
While firm infrastructure is sometimes viewed as overhead, it can be a powerful source of competitive advantage
Primary and Support Activities
Support Activities
Human resource management
Consists of activities involved in
recruiting, hiring, training, developing,
and compensating all types of
personnel
Primary and Support Activities
Support Activities
Technology Development
Includes activities typically associated with MIS, engineering, and R&D and involve activities that seek to improve product and processes.
Primary and Support Activities
Support Activities
Technology Development
New product and process development are primary concerns of technology development support activities
Primary and Support Activities
Support Activities
◦ Procurement
• Involves activities associated with
identifying, evaluating, selecting,
managing, and developing sources of
supply
Primary and Support Activities
Support Activities
◦ Procurement
Though purchased inputs are commonly
associated with primary activities,
purchased inputs are present in every
value activity, including support activities.
Primary and Support Activities
Support Activities
-Procurement
Examples:
Supplies
Travel services
Media
What is Value Chain
Integration? Value chain integration involves
bringing together different groups,
functions, or organizations, either
formally or informally, physically or
by information technology, to work
jointly and often concurrently on a
common business-related
assignment purpose
Horizontal Integration Across the
Value Chain
Examples of how firms integrate
across the value chain--
◦ Committees/groups/teams
◦ Shared and linked information systems
◦ Integrated performance
goals/objectives/measures
◦ Strategy development process
Horizontal Integration Across
the Value Chain
Examples of how firms integrate across the value chain—
◦ Co-location of personnel within and
between the organization
◦ Through a process orientation
◦ Informal or ad hoc exchange of information
◦ Shared risk and reward projects
Purchasing’s Operational and Strategic
Contributions
1. Supply Contribution
Operational
Trouble Prevention
Strategic
Opportunity Maximization
Purchasing’s Operational and Strategic
Contributions
2. Supply Contribution
Direct
Bottom-Line Impact
Indirect
Enhancing Performance
of others
Purchasing’s Operational and Strategic
Contributions
3. Supply Contribution
Negative
Operationally deficient
Strategically deficient
Directly deficient
Indirectly deficient
Neutral
Operationally acceptable
Strategically deficient
Directly acceptable
Indirectly deficient
Positive
Operationally acceptable
Strategically acceptable
Directly acceptable
Indirectly acceptable
The Opportunities for Contribution of
the Purchasing/Supply Function
Profit-leverage effect
Return-on-assets effect
Information source
Effect on efficiency
Effect on competitive position and customer satisfaction
Effect on image
Training ground
Management strategy and social policy
Characteristics of an Integrated
Strategic
Procurement and Sourcing Function Executive Leadership
Executive committee support
for integration across
company and strategic
business unit corporate plans
Strategic Positioning
• External/internal customer focus
• Matrix management
• High-level positioning - second, third
or fourth levels
Functional Leadership
• Company-wide customer-
focused leadership
• Establish integrated visions
workers at results and
processes
• Drives supply base/supplier
management strategies
company-wide
Integration
• Cross-functional, cross-
location teaming
• Part of the technology,
manufacturing and SBU
planning process
Characteristics of an Integrated
Strategic
Procurement and Sourcing Function Supply Base Strategy
Quality driven
Design standardization
Concurrent engineering
Supply base optimization
Commercial strategy emerging
Supplier Management
• Focused on supplier development
• Joint performance improvement efforts
• Value focused
• Total cost improvement
• Supplier benchmarking
Measurement
• Customer orientation
• Total value/cost focused
• Benchmarking with best in
class
Systems
• Global databases
• Historical performance data
• Strategic
• EDI, Internet, EFT, CAD, CAM
Professionalism in Purchasing
New assignments
Education
College recruitment
Training programs
Salary levels
Professional associations
Challenges Facing
Purchasing B2B e-commerce
Supply chain management
Measurement
Purchase of non-traditional goods and
services
Contribution to corporate strategy
Recognition by senior management
Purchasing Objectives
“What makes a department world-class?”
Objective 1: Support Operational
Requirements
◦ Uninterrupted flow of high-quality material.
Objective 2: Manage the Purchasing
Process Efficiently and Effectively
◦ Limited resources necessitate best use of
resources.
Purchasing Objectives
“What makes a department world-class?”
Objective 3: Supply Base Management
◦ Develop reliable, high-quality sources of supply.
Objective 4: Develop Strong
Relationships with Other Functional
Groups
◦ Strong cross-functional relationships must exist
internally.
Purchasing Objectives
“What makes a department world-class?”
Objective 5: Support Organizational Goals and Objectives. ◦ Purchasing must follow organizational
directives.
Objective 6: Develop Integrated Purchasing Strategies That Support Organizational Strategies. ◦ Purchasing’s goals must be aligned with
company’s goals
Purchasing’s Span of Control
What decisions does Purchasing have legitimate authority to make?
◦ Evaluate and Select Suppliers
◦ Review Specifications
◦ Act as the Primary Contact with Suppliers
◦ Determine the Method of Awarding Purchase Contracts.
Goals of the Purchasing
Function Provide an uninterrupted flow of materials,
supplies and services required to operate the organization
Keep inventory investment and loss at a minimum
Maintain and improve quality
Find or develop competent suppliers
Standardize, where possible, the items bought
Purchase required items and services at lowest cost
Goals of the Purchasing
Function Achieve harmonious, productive working
relationships with other functional areas within the organization
Accomplish the purchasing objectives at the lowest possible level of administrative costs
Improve the organization’s competitive position
The Purchasing Cycle
The Purchasing Process as a Cycle consists of five major stages. ◦ Identify user need
◦ Evaluate potential suppliers
◦ Bid, negotiate and select supplier
◦ Purchase approval
◦ Release and receive purchase requirements
◦ Measure supplier performance
Purchasing’s Prime Decision
Authority
Select the supplier
Use whichever pricing method is
appropriate
Question the specifications
Monitor contacts with potential suppliers
Organizing The
Purchasing Function
Four major areas of specialization within the purchasing department.
1. Sourcing and Negotiating
-Identifies potential suppliers.
2. Purchasing Research
-Long-range material forecasts
-Boundary scanning
Organizing The
Purchasing Function
Responsibilities and Tasks commonly performed by the purchasing function:
-Buying
-Expediting and Inventory Control
-Transportation
-Managing Countertrade Agreements
Organizing The
Purchasing Function
Four major areas of specialization within the purchasing department.
3. Operational Support and Order Follow-up
-Expediting orders
-Releasing orders
4. Administration and Support
Organizing The
Purchasing Function
Responsibilities and tasks commonly performed by the purchasing function.
-Insourcing/ Outsourcing
-Value Analysis
-Purchasing Research/Material Forecasting
-Strategic Supply Management
-Other Responsibilities
Organizing the Purchasing Function Separating Strategic and Operational Activities
Manage relationships with critical suppliers
Develop electronic purchasing systems
Implement company-wide best practices
Negotiate company-wide supply contracts
Manage critical commodities
Strategic Sourcing
Activities
Organizing the Purchasing Function Separating Strategic and Operational Activities
Manage transactions with suppliers
Use e-systems to obtain standard or indirect
items through catalogues
Source items that are unique to the operating
unit
Generate and forward material releases
Provide supplier performance feedback
Operational Activities
Various Titles of the Chief
Purchasing Officer
Director of Purchasing
VP of Purchasing
Manager of Purchasing
VP of Materials Management
Materials Manager
Purchasing Reporting Relationships
Position to Whom the CPO Reports 1988 % 1995 %
President 16% 16
Executive VP 19 15
Senior VP/Group VP * 19
Financial VP 7 10
Manufacturing/Operations VP 24 15
Materials/Logistics VP 8 7
Engineering VP 1 1
Administrative VP 13 9
Other (many of whom were VPs) 12 8
Functions that Report to Purchasing: CAPS Study T. E. Hendrics and J.A. Ogden, Chief Purchasing Officers’ Compensation
Benchmarks and Demographics: A 2001 Study of Fortune 500 Companies,
Tempe, AZ: Center for Advanced Purchasing Studies, 2002.
Function 1988 % 1995 %
Scrap/surplus disposal 57 63
Materials and purchasing research * 60
Inbound traffic 40 51
Stores/warehousing 34 41
Inventory control 37 41
Material planning * 40
Outbound traffic 31 39 * category not identified in study
Purchasing Activities
Purchasing/buying Purchasing research Inventory control Transportation Environmental and investment
recovery/disposal Forecasting and planning Outsourcing and subcontracting Nonproduction/nontraditional purchases Supply chain management
Typical Purchasing Organization
Structure - Medium Sized Company
Director of
Purchasing
Manager
Administration
and Processes
Commodity
Manager
Commodity
Manager
Materials
Manager
Buyer
Buyer
Buyer
Buyer
Manager
e-Purchasing
Manager
p-cards
Stores/
Warehouse
Manager
Receiving
Inspection
Manager
Manager
Purchasing
Research
Manager
Transportation
Director of
Purchasing
Manager
Administration
and Processes
Commodity
Manager
Commodity
Manager
Materials
Manager
Buyer
Buyer
Buyer
Buyer
Manager
e-Purchasing
Manager
p-cards
Stores/
Warehouse
Manager
Receiving
Inspection
Manager
Manager
Purchasing
Research
Manager
Transportation
Placement of Authority
Decision making authority exists on a
continuum:
DECENTRALIZED CENTRALIZED
HYBRID
Potential Advantages and
Disadvantages of Centralization
Advantages
greater buying specialization
ability to pay for talent
consolidation of requirements - clout
coordination of policies and procedures
effective planning and research
common suppliers
proximity to major organizational
decision makers
critical mass
firm brand recognition and stature
reporting line - power
strategic focus
cost of purchasing low
Disadvantages • narrow specification and job boredom
• lack of job flexibility
• corporate staff appears excessive
• tendency to minimize legitimate
differences in requirements
• lack of recognition of unique needs
• focus on corporate requirements, not on
business unit strategic requirements
• even common suppliers behave
differently in geographic and market
segments
• distance from users
• tendency to create organizational silos
• customer segments require adaptability
to unique situations
• top management not able to spend time
on suppliers
• lack of business unit focus
• high visibility of purchasing costs
Potential Advantages and
Disadvantages of Decentralization
Advantages
easier coordination/communication with operating department
speed of response
effective use of local sources
business unit autonomy
reporting line simplicity
undivided authority and responsibility
suits purchasing personnel preference
broad job definition
geographical, cultural, political, environmental, social, language, currency appropriateness
hide cost of supply
Disadvantages • more difficult to communicate among
business units
• encourages users not to plan ahead
• operational versus strategic focus
• too much focus on local sources -
ignores better supply opportunities
• no critical mass in organization for
visibility/ effectiveness - “whole person
syndrome”
• lacks clout
• suboptimization
• business unit preferences not
congruent with corporate preferences
• small differences magnified
• reporting at low level in organization
• limits functional advancement
opportunities
• ignores larger organizational
considerations
• limited expertise for requirements
• lack of standardization
Potential Advantages of the Hybrid
Structure
Hybrid
structure
Centralized Decentralized
Disadvantages Disadvantages Advantages Advantages
Placement of Purchasing Authority (Data from 172
US Firms)
Currently
In 5 Years
Highly Decentralized (1)
Moderately Decentralized (2)
Decentralized with some
Coordinated Procurement (3)
Decentralized with some
Controlled Procurement (4)
Moderately Centralized (5)
Highly Centralized (6) 20.3%
27.3%
27.9%
32.6%
19.8%
18.6%
19.2%
13.4%
5.2%
5.2%
7.6%
2.9%
Current Average = 4.16
Expected Average = 4.55
Purchasing and Supply
Teams Cross-functional teams
Teams with suppliers
Teams with customers
Teams with suppliers and customers
Supplier councils - key suppliers
Purchasing councils - purchasing personnel only
Commodity management teams
Consortiums
Team Leader Responsibilities
Work with the team to establish and
commit to performance goals
Secure individual member involvement
and commitment
Manage internal team conflict
Help maintain team focus and direction
Secure required organizational
resources
Team Leader Responsibilities
Prevent team domination by a member or function
Deal with internal and external obstacles confronting the team
Coordinate multiple tasks and manage the status of team assignments
Clarify and help define each team member’s role
Provide performance feedback to members
Keys for Successful
Consortiums Reducing total costs for the consortium
members
◦ Through lower prices, higher quality and better
services
Eliminating and avoiding all real and
perceived violations of anti-trust
regulations
Installing sufficient safeguards to avoid
real and perceived threats concerning
disclosure of confidential and proprietary
information
Keys for Successful
Consortiums
Mutual and equitable sharing of risks, costs
and benefits to all stakeholders, including
buying firms/members, suppliers and
customers
Maintaining a high degree of trust and
professionalism
Maintaining a strong similarity among
consortium members and compatibility of
needs, capabilities, philosophies and
corporate cultures
Co-Locating Purchasing with Internal Customers
Operations Engineering Marketing
supplier performance
internal requirements
in cost, quality,
delivery, cycle time
capacity, material,
and service needs
material
specifications
evolving product and
process technology
requirements
new product
requirements
demand planning
requirements
new product ideas
promotions and
planned demand
shifts
Procurement Support Personnel
Formally report to the procurement organization
Gain insight into... Gain insight into... Gain insight into...
Purchasing and Supply Chain Management, 3e Monczka,/Trent/ Handfield Thomson Learning Copyright 2005
Companies Look to
Purchasing to Add Value
A world-class purchasing staff must
provide cost-reductions, improve supply
chain quality, gain access to new
sources of technology, improve cycle
time, involve suppliers in product and
process development, and streamline
processes.
The Essential Steps in the Purchasing
Process
1. Recognition of need
2. Description of need
3. Determination and analysis possible sources of supply
4. Determination of price and terms
5. Preparation and placement of the purchase order
6. Follow-up and/or expedite the order
7. Receipt and inspection of goods
8. Clear the invoice and pay the supplier
9. Maintain records and relationships
1. User need for Product or Service
Approved
Supplier?
Purchasing Card
On-line catalog
Electronic Data
Interchange
Stock Check
Automated Reorder
Point
NO
YES
Small $
Amount?
YES NO
4. Purchase
Approval
Specification
Statement of Work
New product requirement
Customer order / MRP
Traveling req / barcode
Purchase requisition
2. Evaluate
Suppliers
3a. Bid and/or
Negotiation
3b. Supplier
Selection
Purchase Order
Blanket PO
Purchase Release
5. Release and
Receive
Product or
Service
Bill of Lading
Packing Slip
Discrepancy Report
Kanban
Acknowledgement
Supplier
Invoice
Match PO and
Invoice
Payment to
Supplier
6. Update
Supplier
Scorecard Input used
To Award
Future
Business
E-Procurement
Documents
The Purchasing Process
Request for
Quote /
Information
Complex
Requiremen
t
?
YES
NO
Purchasing & Supply Chain Management 3e, Monczka/Trent/Handfield
Thomson Learning, Copyright 2005
Some Possible Methods of Reducing
Small Order Transaction Costs
Stockless buy and systems contracts P-cards Blanket P.O.s EDI- and Internet-based systems Reverse auctions Changing authority levels and bidding
practices Single sourcing Outsourcing small value order processing Standardization Batch orders Set requisition schedule Invoice-less payments Users pay directly
Information Needed for Requisitions
Date Number (identification) Originating department Account number Complete description of material or service
and quantity Date material or service needed Any special shipping or service-delivery
instructions Signature of the requisitioner
Internal Information Flows to Purchasing
Purchasing
engineering
planning
production
budgeting
financial control
accounting legal receiving
quality control
inventory control
new products
production control
sales
forecasting
External Information Flows to
Purchasing
Purchasing
general
market
conditions sources
of
supply
suppliers’ capacity
suppliers’
production rates
labor conditions sales and
use taxes,
customs
prices and
discounts
transportation rates
transportation
availability
new product
information
product
information
Internal Information Flows from
Purchasing
Purchasing
General
Management Product
Development
Marketing
Finance
Accounting Stores
Legal
Production
Engineering
Economic
conditions Product and
price information
Competitive
conditions
Budget
commitments
Costs, prices
adjustments Orders
placed
Contracts
Source, product,
price information
Product availability,
lead time, price
and quality
When to use Competitive Bidding
Conditions for Competitive Bidding:
◦ High enough volume
◦ Clear specifications
◦ Competitive marketplace
◦ Adequate time for the process
◦ If no preferred supplier exists
When is Negotiating Better?
Conditions for Negotiating: ◦ When a criteria for competitive bidding is
missing.
◦ When price is not the only deciding factor.
◦ When Early Supplier Involvement is needed.
◦ When supplier can’t determine risks and costs.
◦ When development and production time are lengthy.
Types of Purchases
Classifications of Goods and
Services:
◦ Raw Materials : petroleum, coal, lumber
◦ Semifinished Products and Components:
subassemblies, semi finished products
◦ Finished Products: a complete, saleable
product
◦ MRO: maintenance, repair and operating
items
Types of Purchases
Classifications of Goods and
Services:
◦ Production Support Items: packaging
materials, tapes, glues, etc.
◦ Services: payroll services, lawn care,
snow removal
◦ Capital Equipment: production machinery,
new manufacturing facilities
◦ Transportation and Third Party
Purchasing: logistics services,
management of inbound and outbound
materials.
Selected Activities
• Confirm user requirements
• Develop category definition
• Define basic characteristics
• Understand industry and supply
markets
• Assess bargaining position
• Evaluate alternative strategies
• Select appropriate approaches and
techniques
• Identify qualified suppliers
• Determine supplier value-added
capabilities
• Develop supplier “short list”
• Verify and adjust sourcing strategy
• Develop implementation plan
Sourcing Process
FedEx Strategic Sourcing Process
Profile the Sourcing
Group
Select Sourcing Strategy
Generate Supplier
Portfolio
Select Implementation
Path
Selected Activities
• Plan negotiation strategy
• Evaluate supplier proposals
• Conduct negotiations with suppliers
• Recommend sourcing decision
• Plan and implement transition to
new suppliers relationships
• Link key processes
• Conduct joint process improvement
activities
• Monitor market conditions
• Assess new technology and best
practices impact
• Conduct benchmarking activities
• Determine appropriateness for
reexamining category
Sourcing Process
FedEx Strategic Sourcing Process
Negotiate and Select
Suppliers
Operationalize
Supplier Integration
Benchmark the
Supply Market
Purchasing & Supply Chain Management 3e, Monczka/Trent/Handfield
Thomson Learning, Copyright 2005
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